I Heard President Obama Is Changing the Overtime Rules. What’s That About?

OK, maybe you didn’t ask this question, but maybe you should have—at least if you own a company that employs salaried workers, or if you yourself are a salaried employee.

Let me tell you why. The U.S. Department of Labor recently announced rules that will expand the number of salaried workers who are eligible for overtime pay under the Fair Labor Standards Act (FLSA). The rule changes affect nearly all employers in North Carolina and will take effect right before the holidays, on December 1, 2016. Companies that fail to react in time to the new rules could be subject to litigation that requires payment of double overtime to employees who should have received time-and-a-half pay.

Salaried Workers Can Receive Overtime Pay

By way of background, the number of salaried workers who are eligible for overtime pay has fallen drastically over time. (Don’t make the mistake of thinking that just because an employee is paid a salary they are not entitled to overtime pay. Not true.) In 1975, when the FLSA was enacted into law, 62 percent of salaried workers qualified for overtime. By 2016, due to inflation, that number fell all the way to just 7 percent.

The new Obama rules will restore the number back near 35 percent.

Diving into some of the important details, the changes relate to the “white-collar salary” exemption. In other words, we’re talking about exceptions to the normal rule that requires time-and-a-half pay for all overtime hours (i.e., all hours worked above 40 in a given workweek). Before your eyes glaze over, let’s break this down. There are really two parts to this: (1) “white-collar,” and (2) “salary.”

Let’s start with the “salary” part

Not just any salary counts for a worker to be exempt from overtime requirements. The salary must be high enough.

Under the current rule, the salary threshold is $455 per week (or $23,660 annually). Starting December 1, 2016, the increased salary threshold will more than double to $913 per week (or $47,476).

If a worker makes less than this amount in salary, they automatically qualify for overtime pay, period. End of story.

So what happens if a worker makes more than the salary threshold? Then, you must move onto Part II of the analysis.

Now the “white-collar” part

It is not enough that a worker makes more than the salary threshold to be exempt from overtime pay. They also must satisfy the white-collar test (also known as the “primary duty” test).

The basic idea here is that if your job involves backbreaking manual labor, you should always be eligible for overtime pay, no matter how much you make in salary. The white-collar test makes sure that the exemption is limited to those workers whose primary duty is to perform certain office or non-manual work.

To satisfy the test, a worker’s primary duty must be one of the following:

• Executive: Managing and directing at least two other employees, with some authority to hire and fire

• Administrative: Work related to the management or business operations of the company, including “the exercise of discretion and independent judgment with respect to matters of significance” (how’s that for a clear standard?)

• Learned Professionals: Work that is mostly intellectual in character and that requires specialized academic training and advanced knowledge in a field of science or learning

• Teachers, Doctors, and Lawyers. Oh my! I’d like to think us lawyers are included in the above, but just in case there was any doubt, we’re listed separately.

• Creative Professionals: Work that requires “invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor” (e.g., music, writing, acting, and graphic arts)

• Outside Sales Employees: Workers who make sales and obtain orders or contracts for services. We’re not talking about inside cats here, only outside cats (meaning the employee is regularly engaged in making sales away from the employer’s place of business).

• Computer Employees: This does not mean all employees who sit in front of computers all day (of which there are many). This category is limited to computer programmers, software engineers, and the like.

Workers whose primary duties do not fit into one of these categories must be paid overtime, even if they are paid more than $913 per week in salary (under the new rules).

And closing with the fine print

The new rules also provide some flexibility in what payments count towards calculating an employee’s salary. Under the previous rule, only the salary payment counted. Starting in December, non-discretionary bonuses and incentive pay can count towards the calculation, but only up to 10 percent of the amount (in other words, up to $91.30 per week in “salary”) and only if the payments are made at least on a quarterly basis.

In other words, the holiday bonus that Clark Griswold expected to receive doesn’t count (because it’s both discretionary and paid annually).

There are other caveats to the overtime regulations, including for highly compensated employees (HCEs) who make more than $134,000 per year. But there isn’t enough space in this blog post to cover all of the details.

Contact an Attorney at Spengler Agans Bradley

Contact our attorneys to ensure your company’s employment practices comply with the law, or to investigate whether you may have a claim for unpaid overtime from your employer. Spengler Agans Bradley offers a flat-rate legal checkup for startups and business needing a broad, overall legal review of their business and business practices.

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